October 18, 2014 by ...
In China the communist party is to business what flour is to a cake, it is the building block. Perhaps I should rephrase that; flour is cake whereas the communist party is nothing more than that lecherous monstrosity lording over all things Chinese, but then again how appealing does that sound?
Lets just agree on using different terms. If Chinese businesses were cake, the communist party would be the knife. It slices and dices off bits and pieces, deciding who gets how much and when. Hell, it even is known to shave off the juiciest parts for its own less than invisible hand.
It should come as no surprise then, that a chummy relationship with Beijing and the party decides how much largesse one is allowed to enjoy in China.
Now, now, I see you shaking your head mumbling things about ‘China being a free market’ and ‘all governments intervening in trade.’ I would like to commend you in your academic rigor, Econ 101 has served you well!
Subsequently I’d have to say that everything in life is relative. For example, the girl named Dana in my fourth grade class was a cutie, but nothing compared to Shakira. Likewise, Aunt Rose’s coffee was good, but is it Starbucks…..
Thus we see how things are best understood by comparing and contrasting them. After all, pigmies would be giants if it weren’t for the rest of us. Comparison helps us to put things in order.
Having set the stage appropropiately I would like to address what impact Lei Jun’s communist party membership may have on his business.
We know how upset China is that its companies literally make no profit in the $300bn global phone business. Sure it is home to 100 companies but they are mostly ‘me too’ shanzhai players, or knock offs of the big boys. The party would like to change all that, however, and actively supports the telecom sector, benefitting Xioami.
Beijing often illegally subsidizes industries
Usha Haley et. al. details how aggressive and prevalent Beijing is in supporting its hometown favs. For a great look at this go no further than here-Subsidies to Chinese Industry: State Capitalism, Business Strategy, and Trade Policy by Usha C.V. Haley and George T. Haley (Mar 27, 2013).
She essentially shows how Beijing finances industries which it wants to dominate and has no qualms in so doing. Utilizing this strategy ‘Beijing favored’ firms can go from being a bit player to market maker within one decade. Which is about one -half the time it took Xiaomi sales to skyrocket.
This is not to say that Beijing built up Xiaomi, after all, it was Huawei who the communist party chose to be their phone of choice, but one can rest assured that the plate of Lei Jun has a choice piece of chocolate with a goodly hunk of frosting heaped on top.
Power to the party
In his book ‘The Party’ reports that in China the communist party is like god, ‘it is everywhere’. This being the case, it cannot hurt to be sitting on the governmental NPC as shown below.
Excerpt- ‘Lei Jun, chief executive officer of smartphone maker Xiaomi Corp, is also a deputy to the National People’s Congress. Prior to 2013, Chen Tianqiao, chairman and the CEO of game operator Shanda Interactive Entertainment Ltd, was among few who entered the NPC or the CPPCC from the Internet industry.
Internet players’ voices will be more easily heard on such a national platform, said Bi Yantao, director of the Center for Communication Studies at Hainan University. There are limits set for the Internet industry and it will be good to have more communication channels with decision-makers, Hong Bo, a Beijing-based IT expert and founder of consultancy company IT5G, told state-run China Daily.’
In all fairness Lei’s communist cred is more important than his being a member of the governmental organ which has nothing to say about passing the ‘laws’ which it is supposed to shepherd per the Chinese constitution, but I digress. By joining the power brokers in Beijing under the auspices of ‘law making’, Lei not only gets a gullet filled with Maotai, but great guanxi as well. In China this is the single best competitive advantage a company can have.
Home field advantage
Party membership and the very fact that he is Chinese offers Lei Jun and Xiaomi considerable legal advantages. For example, foreign firms have paid 80% of the fines levied for monopolistic pricing since China began enforcing’ its anti-monopoly code.
Interestingly enough, companies such as Apple, GM and even Starbucks where targeted while none of them had anything close to Alibaba’s 84% market share. But then again, none of those American firms had purchased companies owned by kin of PLA Generals.
Well… Where does that leave us?
Suffice it to say that like most businessmen in China, Lei Jun knows which side of his bread to butter. He’s made the contacts, licked the boots and planted seeds in that huge fertile soil called China. By meeting up with his Beijing cronies, Lei can rest assured a blind side attack is not in the offing. Suffice it to say that unless Mr Lei angers someone whose last name has two letters and starts with an ‘X’, Xiaomi will be ‘allowed’ to continue to do business.